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The summer heatwave and its effects on the economy

The heat is on

Every new day marked by extreme weather reminds us of the record-breaking heatwave during the summer of 2018. Humans, and nature in general, are not the only forces to suffer from the tropical temperatures, as the economy has also been feeling the consequences of the relentless drought. Companies have reported decreasing numbers of customers, problems along the supply chain and dwindling crops. If climate scientists are right, we’re going to be grappling with ever more frequent droughts and extreme weather in the future – which is reason enough to take a look at how heatwaves and dry spells are impacting the economy.

Consecutive record years

With temperatures averaging 10.4° Celsius, 2018 was the hottest year since recording began, in 1881. Of the ten years with the highest average temperatures, six alone were in this decade. Climate researchers are certain that high temperatures and dry weather are going to continue to intensify in the years to come.

While this may be good news for beverage makers and ice cream parlours, many other businesses are faced with a major challenge. In a global survey by KPMG, more than one out of five CEOs cited climate change as the biggest threat to their companies’ growth. Droughts, heavy rainfall and storms, in other words, landed on top of the list of the most serious threats – ahead of protectionism, risks from new technologies and cybersecurity risks.

The 2018 heatwave is proof that we’re not talking about some abstract risks in the distant future but rather that climate change is already taking a very direct toll on businesses today.
For example:

Agriculture and foresty: massive decline in harvests

Farmers in 2018 experienced massive reductions in crop output. Compared to the three-year average (2015 - 2017), the potato yield was 19 percent lower, while wheat and rapeseed production dropped 12 percent, and maize even by 39 percent. Livestock companies, for their part, were hit hard by surging feed prices. The German Farmers’ Association puts the total tally at around EUR 3 billion in damage caused by the drought. The effects of the drought are still being felt by farmers in this year. Although the German Farmers’ Association expects higher crop output for 2019 than in the previous year, the soil is still too dry overall.

The forest industry is also feeling the wrath of the dried-out summer. Due to a lack of sufficient water, the trees produced less resin, which protects them from pests. As a result, large swaths of forests were decimated by bark beetles. “Emergency tree felling” is creating an oversupply of wood, leading in turn to sinking prices and profits.

Logistics and industries: interrupted routes and absent raw materials

Low water levels hampered Germany’s inland ship transport. Numerous rivers were either impassable entirely or only able to carry reduced cargo. This drove earnings down for barge shippers while also taking a toll on companies which rely on the relatively environmentally-friendly water transport to convey their products and raw materials. Among the deliveries affected were coal imports for power plants, iron ore for blast furnaces used in steel-making, construction materials and fuels.

Companies reported rising transport costs coupled with interruptions in supply and production that hurt their balance sheets. BASF, for example, took a hit of around EUR 250 million in operating earnings. For 2019, the company has reserved special motor barges for low water. Covestro, a German producer of specialty chemicals, cited production losses and higher logistics costs – both caused by the low water level of the Rhine River – as factors contributing to the decline in operating earnings in 2018.

Lower transport capacities also drove petrol and heating oil prices up, prompting some petrol stations to report supply bottlenecks. In lieu of inland container ships, mineral oil companies had to employ 100 lorries or 40 tank cars in order to ensure delivery.

Other means of transport were also affected by the heat. Rail tracks buckled under the high temperatures, while motorways and other roads broke. The Hanover airport was forced to temporarily close a landing strip due to warped pavement.

Utilities: restricted production

High water temperatures left coal and nuclear power plant operators with no choice but to cut back their energy production. Why this is so: once water reaches a temperature of 28° Celsius, the volume of cooling water which power plants are permitted to discharge into the rivers becomes restricted.

But it wasn’t only conventional power plants that were impacted by the high temperatures: power stations that were in fact designed to help protect the climate suffered from the dry weather. This was especially the case with dispatchable alternative energies. Crop shortages meant fewer key commodities for biogas plants, particularly maize. At the same time, the long drought periods put electricity generation by Germany’s roughly 7,300 hydro-electric power plants at 16.5 TWh – a far cry from the previous-year output and the lowest level since 1991.

Retail, textile and water management – more branches affected

Also falling victim to the heatwave were brick-and-mortar stores, which saw fewer customers as the would-be shoppers were drawn more to the lake than to the mall amid the tropical weather. Textile companies waited until autumn to showcase their autumn and winter collection, so persistent was the heat. For Germany’s 6,000 or so water plants the summer of 2018 was truly a stress test. If these dry spells keep returning over the years to come, the situation for the water supply will be dire. Municipalities also had to shoulder extraordinary financial burdens such as those tied with irrigating grassland.

Planning ahead is necessary

Every branch must come up with its own strategy for dealing with the consequences of climate change, which are already being felt today and are only going to intensify in the future. Managing “heat risk” would entail measures ranging from the use of heat-resistant plants and weather derivatives trading to the diversification of industrial logistics chains to the creation of alternative means of disposing of cooling water for power plants to the use of alternative biomass in biogas plants.